4/30/2010 @ 5:12PM

Outcome-Driven Supply Chains

We understand supply chains as offering three primary benefits: They reduce cost, speed up delivery and improve quality. But how do we turn our supply chains into competitive tools? That takes more sophistication.

A new paradigm is emerging that will help companies develop and sustain competitive advantage, letting them design supply chains that deliver more specific outcomes.

First, supply chains could help reduce cost. Second, they could improve responsiveness–the ability to change quickly as conditions change. That could involve volume, mix or location. Third, they could improve security–ensuring that products will not be contaminated or otherwise unsafe. Fourth, they could improve sustainability, eliminate waste, reduce pollution and in other ways improve the environment. Fifth, they could improve resilience–the ability to recover quickly and cost effectively from, say, economic setbacks or technical failures. And sixth, they could improve innovation. Increasingly over the past few years, companies have relied on their supply chains as sources of new products and processes. For example,
Procter & Gamble Co.
obtained new antiwrinkle technology from a small French cosmetics company, which led to P&G’s highly successful Olay Regenerist line of skin creams.

Some researchers and managers might regard these six basic outcomes as mutually exclusive. But effective supply chains are often hybrids, reflecting various combinations of the six. In fact, supply chains that focus on only one of the six are flawed, as they can’t develop and maintain a sustainable advantage over their competitors. Those supply chains that offer low cost alone aren’t able to respond sufficiently to unexpected changes in demand and supply. These overfocused supply chains also often can’t meet the requirements of newly emerging business environments.

The goal is to arrive at a blend that differentiates a supply chain from its competitors–a blend that key customers find attractive and for which they’re willing to pay. There are some things to bear in mind while trying to achieve this blend.

First: Blending outcomes means making trade-offs. If a supply chain manifests numerous outcomes, it’s unlikely to outperform, on any single outcome, another supply chain that focuses more heavily on it. That’s the price of being adaptable–and for being ready for market conditions to change.

Second: When blending outcomes, make sure at least one of them stands out. It’s tempting to build a supply chain that does a decent job on every outcome but fails to excel at any of them. That approach can lead to mediocrity.

Third: Blending outcomes complicates measuring performance. Dealing with only one outcome makes it easier to design metrics. But blending several outcomes means measuring them becomes more complex. Reducing performance along one dimension might be necessary to allow performance improvements in other dimensions. It’s also important to choose performance measures with care. If the goal is to develop a supply chain that delivers responsiveness and sustainability, then a focus on measuring and rewarding cost might create confusion and frustration.

Fourth: Some combinations of outcomes are complementary, some are not. For example, a cost-focused supply chain that emphasizes waste reduction and control can more readily be transformed into a sustainable supply chain, since many of the tools and processes are the same. But other outcomes should never be blended, such as innovation and cost. Here the procedures for attaining one outcome negatively affect the other. Cost-oriented supply chains regard slack as something that must be eliminated or reduced. But innovation demands slack for success. Failure is likely to occur during the innovation process, and slack provides safety in the form of resources to complete the task without jeopardizing other parts of the business. For innovation truly to be successful, you need a diversity of processes and improvements.

This article is adapted from “Outcome-Driven Supply Chains” by Steven A. Melnyk, Edward W. Davis, Robert E. Spekman and Joseph Sandor, which appeared in the Winter 2010 issue of MIT Sloan Management Review.